From bitcoin and ethereum to tether and dogecoin, there are a wide variety of cryptocurrencies to choose from. For many who have opted in, crypto has yielded impressive returns. However, for others, it has led to devastating losses, not to mention encounters with scams and fraud in the industry.
So is this buzzy digital currency worth adding to your investment portfolio, or is it better to steer clear? We lay out the pros and the cons to help you decide.
What exactly is cryptocurrency?
Cryptocurrency “is a digital currency, such as bitcoin, that is used as an alternative payment method or speculative investment,” meaning an investor hopes to profit from a change in value when they go to sell, said NerdWallet.
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Typically, “cryptocurrencies exist on decentralized networks using blockchain technology — a distributed ledger enforced by a disparate network of computers” — and “are generally not issued by any central authority,” said Investopedia.
What are the upsides of investing in crypto?
Depending on the type of investor you are and your tolerance for risk, crypto can offer upsides as an investment, including:
It is a decentralized currency. For many, a major upside of crypto is that it is a “decentralized currency, meaning it’s not regulated by a single government or central bank,” said Credit Karma. In other words, “governments can’t control [crypto] like they can with centralized fiat currency such as the U.S. dollar.”
It offers diversification. One potential benefit of crypto for your portfolio is that owning some “can increase your portfolio’s diversification since cryptocurrencies such as bitcoin have historically shown few price correlations with the U.S. stock market,” said The Motley Fool. Diversification is key when investing, as it spreads your portfolio across a number of different types of assets, buffering against market volatility.
It may provide sizable returns. Though it is far from guaranteed this will happen, “several cryptocurrencies have seen their prices skyrocket since first being introduced,” said Bankrate. This translates to “the potential for large gains on your investment.” Plus, since “the sector is quite new,” there are “potentially many more changes that may come down the line to make investing in cryptocurrencies even more attractive,” said Corporate Finance Institute, a financial education website.
It is accessible. Another benefit of crypto is that it “can be easily accessible to everyone around the clock, even those without access to traditional banking,” whether due to a checkered banking history, lack of documentation or lack of proximity to bank branches, said Fidelity. Further, “crypto transactions can have lower fees and faster transfer times than some traditional bank transactions.” One caveat: If you lose your password to your digital wallet, there is no recovery process like for other financial products and accounts. Instead, “if you lose your password, you lose access to your bitcoin (and other cryptocurrencies stored in it),” said AARP.
Are there risks or drawbacks to crypto?
While past tales of people making bank on crypto may seem tempting, it is important to heavily weigh the downsides of this investment as well:
It is extremely volatile. While risk of loss is possible with any type of investment,” crypto’s elevated volatility makes it an even bigger risk factor,” said Forbes. As just one example, “Bitcoin has experienced rapid surges and crashes in its value, climbing to nearly $65,000 in November 2021 before dropping to just over $20,000 a year and a half later,” said Investopedia. Further, said Bankrate, since cryptocurrencies “aren’t backed by anything,” that means “the price they trade at is determined by the whims of traders.”
It is susceptible to hacks and scams. Fraud and hacks are both common with crypto. That is because “though cryptocurrency blockchains are highly secure, off-chain crypto-related key storage repositories, such as exchanges and wallets, can be hacked,” said Investopedia. In the past, many exchanges and wallets have been hacked, “sometimes resulting in the theft of millions of dollars in coins.” Further, there are “websites that look like opportunities for investing in or mining cryptocurrencies, but are bogus,” which can deceive less experienced investors, said Charles Schwab.
It lacks government regulation. While some may see it as an upside that crypto is largely unregulated, that can bring downsides as well. “Governments around the world have not yet fully reckoned with how to handle cryptocurrency, so regulatory changes and crackdowns have the potential to affect the market in unpredictable ways,” said NerdWallet. Leaving crypto unregulated also puts “investors at risk of market manipulation and fraud,” said The Wall Street Journal.
It has a major environmental impact. Crypto is often made through mining, which “involves solving complex mathematical problems to verify transactions and create new blocks in the blockchain,” said Credit Karma. This “requires lots of computational power, which in turn requires a large amount of energy.” In fact, according to “a comparison by the University of Cambridge,” said NerdWallet, “worldwide bitcoin mining consumes more than twice as much power as all U.S. residential lighting.” That said, not all types of crypto have the same level of carbon intensity, and “many crypto mining companies are using renewable sources of power and have committed to carbon offsetting,” said Morgan Stanley.
